It was good, but not a shock to see the Reserve Bank cut the Official Cash Rate (OCR) to 3.75% from 4.25%.
This was widely anticipated, so it didn’t really come as any shock, but of course it’s always nice to have the drop confirmed.
But the good news was not really just this week’s change in the OCR. It was what followed that in both the Monetary Policy Statement (MPS) and then the immediate adjustments that the banks have made.
For most of us with mortgages the most important part of the MPS for most of us was the news that the Reserve Bank is signalling more cuts and sooner than previously anticipated.
We have been expecting another 0.25% cut in April, and that was almost certainly confirmed.
The Reserve Bank also indicated that there could easily be another small drop in May. If these two rate drops (April and May) are both 0.25% each, that would see the official cash rate sitting at 3.25% as early as May this year and then there’s a fairly good chance it could even reduce down to 3.00% later in the year – ie another drop.
All this is assuming that the Reserve Banks predictions on the economy and inflation are correct, and so there is still a risk that this might not happen as it’s been suggested.
How Did The Banks React?
the banks all jumped on board straight away, reducing their floating interest rates (as they would be expected to do) but the good news was there were also a number of banks that immediately jumped on board and cut the fixed rates too.
Normally this takes a few days, so this is going to be really interesting as we expect that the banks will jostle for position as the lowest rate and try to get some free marketing out of it.
Banks use the opportunity for headlines!
While the news is all about home loan interest rates the banks are jumping on the band-wagon by offering some ‘special’ rates and by doing so the media give them some free coverage.
It’s quite a good idea as it sounds good, but they tend to usually pick just one fixed rate which may or may not suit you. We’ve seen Westpac offer a 3-year rate of 4.99% and then ANZ with a 2-year rate of 4.99% but neither make a lot of sense for most people as one rate alone will not always benefit when the strategy is to split your lending into more than just one loan.
Instead of focusing on a single low rate offer, you need to be aware of the policies for the loans and then also what all of the various rates they’re offering are.
What’s the talk about mortgage strategies?
Not everybody has a mortgage strategy BUT we all should.
A lot of people have always dealt with the bank, and banks are not big on strategy. Banks like to keep things really simple, and often people have all of their lending lumped into one single loan.
Having all your lending in just one loan may work okay when the interest rates are low, but if rates increase then you will have all of your lending jump up in a single leap – and that can be a real issue financially. Splitting the lending up means spreading the risk so any increases
Over the last couple of months we’ve been suggesting just taking either a low fixed rate or a discounted floating rate while we wait for this week’s reduction. But now we need to consider if that strategy should revert back to a longer-term plan.
The Reserve Bank is still signalling a couple more drops (two to three more reductions this year) but there’s also an element of risk that that won’t happen, especially with some of the things that are happening offshore.
If you look at what’s happening in America with some of the policies that Trump is introducing this has created a lot of uncertainty around the World – and uncertainty can be good, but it can also be bad.
These things create volatility that a small nation like New Zealand can get dragged along in, and for this reason we think it’s time to revert back to a longer-term strategy. It’s all about managing the risk, and the real risk is something could happen offshore that see’s our interest rates here in New Zealand increase.
You also want to have your home loan with the right bank to ensure that you have more flexibility to pay the mortgage off faster. This can save you a lot of money, but also gets you in a far stronger position should those high interest rates return in the future.
If you’re unsure about the strategy, just reach out. It’s something we do a lot of. It’s a simple conversation, and we can restructure your lending to suit your situation. Also, with refixing don’t forget to reach out to an adviser like myself as we can deal with the bank on your behalf and make sure that they give you a good honest interest rate.
Best of all, it costs you nothing to have an adviser helping as the banks do pay us for doing the refixes on their behalf.
In the meantime, I hope this quick update has been useful. Please feel free to share it with anybody else that you know that just likes to keep up to date, as we continue to pop updates on here, and therefore it’s always a good place to just pop back to before making any financial decisions.
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